Tuesday, June 30, 2009

I just checked with this source to see how state&local government purchases during 2009QI compared to where they were in 2008QIII and they declined by $78.8 billion in real terms over this 6 month period (while nominal spending fell from $1848.1 billion per year to $1784.0 billion per year, the GDP deflator rose by 0.83%). A post from Stephanie Kelton was my motivation.

But it isn't their fault. Tax revenues have fallen off a cliff, leaving states with a cumulative budget gap of more than $100 billion for fiscal '09. To deal with these shortfalls, states have laid off or furloughed thousands of employees, raised taxes and fees, and slashed spending on education and other social programs - some, many times over. It was supposed to balance their '09 budgets. But it wasn't nearly enough. As it turns out, state officials were far too optimistic about the '09 revenue picture, and they are scrambling to deal with widening shortfalls before the end of the fiscal year (which, by the way, is tomorrow for all but a few states). At this stage in the game, there are only a couple of ways for states to balance their '09 budgets (it's too late for more tax hikes and spending cuts). Most are expected to do one of two things: (1) tap rainy day funds or (2) use federal stimulus money.

Dr. Kelton argues for even a greater commitment to Federal revenue sharing or “state and local fiscal relief”. She has a point.

Two years after the Cuban Missile Crisis a former Professor of American Civilisation at Brandeis University, Max Lerner, published his book entitled ‘The Age of Overkill’.

Mr Lerner – whose column for the New York Post earned him a place on the master list of Nixon political opponents [1] - noted that the early 1960s represented an historical epoch when, for the first time, at least two great powers have sufficient strength to obliterate each other – to overkill any and all enemy nations.

Lerner went on to describe what was then, and now, “the core of ‘classical politics’” [2]. He wrote that the crucial difference between classical economics and classical politics was that:

“the core of classical economics was wealth, while the core of classical politics was power. In the case of economics, with the acquisition of wealth at its heart, once could cling to a self-regulating system, but only so long as the naïve cult of self-interest could still sustain an economic order. In the case of classical politics, with power at its heart, there could be no question of laissez faire and self-regulation unless the balance-of-power principle is viewed as an automatic self-regulatory mechanism; power was the arbiter as well as the prize, and there was nothing to replace unless it was power itself.”

The animus of classical politics, Lerner explained is prescriptive, competitive and hostile. “The aim of each state is not only to acquire more power for itself, but to prevent enemies and competitors from acquiring more – or any.” [3]

The world, under this system of thought and action, becomes a world of enemies, potential enemies, allies and potential allies. The way to have peace, on the other hand, is to have bigger and better arms than the enemy. “The trouble is that the history to which [the followers of classical politics] point for confirmation is one that confirms the wrong thing. True, the world has always organized for war, but then the world has always got to war it organized for, and has had to pay for it. The payment this time will be intolerably high, which is why overkill has transformed the power problem.” [4]

“The fact is that the nation-state has ceased to be a viable unit of world order exactly because it cannot get along without at some point using its showdown war power, which it dare not do under overkill conditions; yet, when faced with a threat to its identity and survival as a nation, it dare not refrain from invoking its war power, however powerless it be.” [5]

Lerner didn’t suggest that the ‘power principle’, which he also refers to as ‘the principle of evil’ would be discarded in the then, near future. But he does point out that the ruling elites know that the dominance of this principle is a “short range perspective”.

“I suppose that relatively sane men still play with the idea of getting universal peace through universal empire….But, unilateralism aside, the road to world empire is unlikely to be achieved except by a world nuclear war – which might mean that there would not be very much of a world to enjoy the blessings of universal peace.” [6]

Today, forty five years after the publication of Max Lerner’s book, global citizens urgently need to use a much broader definition of ‘overkill’ and to treat the issue as the planetary emergency that it is. "Overkill is the use of excessive force or action that goes further than is necessary to achieve its goal.” [7] A glaring example of this, in the environmental and industrial context, would be the widespread use of residual and very toxic chemicals that are applied in a manner GUARANTEED to drift into drinking water catchments. This abuse is happening even when there are no long term economic justifications for the use these toxic chemicals.

In Siberia “the new rich Russians are hunting Siberian wolves from helicopters.” In Venezuela corporations interested in oil extraction and soya cropping send menacing guards to stop the Indians tribe of Guarani from “trying to protect the remnants of the forest in which they find all their needs for building their huts, natural medicine for health and food.” [8] In Australia – in our time of desperate climate emergency [9], [10], [11] - the world’s most carbon dense native forests are continuing to being intensely logged and converted to woodchip for sale to Japan and China. [12]

It turns out that overkill in classical politics has its equally threatening counterpart in economics. Max Lerner wrote that the historical concern in the classical form of economics was “largely with cyclical and fiscal theory, and with the controls needed to set the malfunctioning right.” In the postclassical stage of economics this disclipline “cuts across capitalist and socialist systems, and focuses on economic growth.” [13] “These growth ideas are being introduced largely into cultural systems where they are not at home” It turns out that economic growth is also “not at home” on a finite planet.

Economics, though, has always served the political agenda.

“The Government is not now and never has been an independent engine operating in a vacuum under its own momentum”; rather, it had ties to the profit economy by the common ideas and connections among people in influential positions. Men in government could not escape a philosophy of private advancement inherent in an economy characterized by intense competition for advantage, for raw materials, and for markets. “In short domestic politics and economics enter into foreign policy and influence its course.” [14]

Today we have, not one, but six global crises as a result of the long term use by Governments of the ‘power principle’ in both economics and politics. They are: the prospect of nuclear overkill; climate change; peak oil; global resource depletion; alarming species extinction rates and global economic collapse. They're all related to each other.

Activist Paul Gilding tries to give a picture of what just one aspect of one of our global crises may look like. Taking the example of sea level rise from climate change:

“We thought maybe 0.3 to 0.5 metres by 2100 was the average sea level rise forecast, a few years ago. It's now gone from 0.3 to 0.5 to 0.8 to 2 or more. Right? So 0.8 to 2 metres by 2100 is a, technically speaking, a shitload of sea level rise. This is a lot of ocean increase, remembering especially that storm surge, in a storm goes in obviously according to geology, around 50 times the level of sea level rise, so a metre of sea level rise takes a storm surge 50 metres more inland, right? So the impacts of this are very, very severe, and very, very significant, and actually not the most important issue in climate change but the one we understand the most because it makes for good graphics.” [15]

We need to find a way to deny every nation its war-making power. We need to also coexist with diverse other life forms on the planet. Quickly. Our form of ‘civilization’ is killing the planet. Our predicament is that we cannot save ourselves with our own will power alone, for to do so “will only make the evil in us stronger than ever.” [16]

"The instinct to command others, in its primitive essence, is a carnivorous, altogether bestial and savage instinct. Under the influence of the mental development of man, it takes on a somewhat more ideal form and becomes somewhat ennobled, presenting itself as the instrument of reason and the devoted servant of that abstraction, or political fiction, which is called the public good. But in its essence it remains just as baneful, and it becomes even more so when, with the application of science, it extends its scope and intensifies the power of its action. If there is a devil in history, it is this power principle. "

Mikhail Aleksandrovich Bakunin

[1] Max Lernerhttp://en.wikipedia.org/wiki/Max_Lerneron 1st July 2009

[2] ‘The Age of Overkill – a Preface to World Politics’ by Max Lerner. 1964. Publisher William Heinemann Ltd, Great Britain. Page 20.

[3] Ibid. Page 21

[4] Ibid. Pages 253 and 254

[5] Lerner qualifies this statement by pointing out that in actual fact the nation-state no longer exists in any sovereign sense “except in diplomatic abracadabra and in its formal voting in the Un and other international bodies. The working power units have become the power systems, which operate from power centers.” They hold “ a moving power equilibrium in the world…” Ibid. Page 254

[6] Ibid. Pages 254 and 255

[7] http://www.absoluteastronomy.com/topics/Overkill

[8] Overkill in Conservation and in the Pristine Forests.http://www.en.articlesgratuits.com/overkill-in-conservation-and-in-the-pristine-forests-id2597.php

[12] Preserving old-growth forests is vital to saving the planetGAVAN McFADZEAN. June 2009http://tasmaniantimes.com/index.php?/weblog/article/preserving-old-growth-forests-is-vital-to-saving-the-planet/

[13] ‘The Age of Overkill – a Preface to World Politics’ by Max Lerner. 1964. Publisher William Heinemann Ltd, Great Britain. Page 153.

[14] American historian Charles Beard from his “Idea of National Interest” pages 89 – 120 as quoted in ‘The American Century – the rise and decline of the United States as a world power’ by Donald W White. Yale University Press. 1996. ISBN: 0-300-05721-0. Page 6.

Monday, June 29, 2009

So, here it is, this big disappointment for many, the great global warming bill passes the House by this 7 vote margin (which means it needed the 8 Republicans who voted for it to pass), a bill criticized by many here for many reasons (Peter Dorman especially), and by all reports loaded down with even more giveaways, loopholes, breaks for farmers and corporations, with a tariff trigger mechanism for 2020 that Obama does not like, but given how far out it is may not matter anyway, and the darned thing is so long (1300 pages?) that it will be a long time before we figure out what is in it really, although at least we know that it involves some sort of cap and trade mechanism, maybe, although with something like 85% of the permits given away rather than auctioned off, and emissions limits to go down so slowly that they will be considered a joke by the rest of the world in Copenhagen in December. What is a body to do or think of this?

Well, actually, the more I think about it, the more I think it is a genuine achievement, at least potentially. That the vote was so close is a reminder of how much opposition to doing anything about global warming there is in the Congress, and when it gets down to it, the public at large, despite all the polls showing people for doing something in the abstract. After all, 44 House Democrats voted against this. While there are Republicans who are lunatics and goofballs following wacko theories and listening to Rush Limbaugh, I suspect the solid majority of those 44 Dems believe that global warming is happening. But they do not see it as any near term threat to their districts, while they see serious potential costs to businesses and employment in their districts, something they are not keen on during a recession at all. After all, for much of the country, global warming is actually economically beneficial in the near term (lower winter heating bills). And in 1995, the Senate unanimously passed the Byrd-Hagel amendment, which said the US should sign no agreement that did not have China and India agreeing to emissions controls, which pretty much put the kibbosh on the US ever ratifying the Kyoto Protocol.

So, keep in mind, folks, cap and trade has been working pretty well for SO2. If warming clearly continues, there is now a mechanism in place that can be used to tighten up and enforce CO2 emissions reductions, if there is sufficient political will (if things cool down, as some predict, well, the whole thing will just be off anyway). So, now we have to get it through the Senate, even if most of the rest of the world thinks it is a pathetic joke. It will still be better than doing the big fat nothing that has been done so far.

In the midst of the Bush-Obama balance sheet bailout, one group stands out in its importance -- bondholders. I know -- a couple of times some bondholders have had to take a haircut to protect other investors.

Here in California, with our $24 billion deficit, it seems like nothing -- absolutely nothing -- and threaten bondholders. Yes, some bondholders are pension funds or charitable organizations. A minority of Republicans along with a movie star governor have adamantly refused to raise taxes, especially those taxes that might affect the class of people who are bondholders.

Education and healthcare are being slashed beyond recognition. My God, even prisons might be cut a bit. The state is also raiding the treasuries of cities and counties for funds. Their response will be the same as the state's: cut back on anything that might help the poor and if necessary extend the cuts to the middle class. All this so that California can payback its bondholders. No haircut here. They must be paid back in full.

And the children, deprived of adequate education and health care, of course, they must make a modest sacrifice to protect the interests of bondholders.

IN the debate over health care reform, one issue looms large: whether to have a public option. Should all Americans have the opportunity to sign up for government-run health insurance? President Obama has made his own preferences clear. In a letter to Senators Edward M. Kennedy of Massachusetts and Max Baucus of Montana, the chairmen of two key Senate committees, he wrote: “I strongly believe that Americans should have the choice of a public health insurance option operating alongside private plans. This will give them a better range of choices, make the health care market more competitive, and keep insurance companies honest.” Even if one accepts the president’s broader goals of wider access to health care and cost containment, his economic logic regarding the public option is hard to follow. Consumer choice and honest competition are indeed the foundation of a successful market system, but they are usually achieved without a public provider. We don’t need government-run grocery stores or government-run gas stations to ensure that Americans can buy food and fuel at reasonable prices.

But what if you lived in an area where there was only one grocery store? Zachary Roth explains my query:

But the notion that most American consumers enjoy anything like a competitive marketplace for health care is flatly false. And a study issued last month by a pro-reform group makes that strikingly clear. The report, released by Health Care for America Now (HCAN), uses data compiled by the American Medical Association to show that 94 percent of the country's insurance markets are defined as "highly concentrated," according to Justice Department guidelines. Predictably, that's led to skyrocketing costs for patients, and monster profits for the big health insurers. Premiums have gone up over the past six years by more than 87 percent, on average, while profits at ten of the largest publicly traded health insurance companies rose 428 percent from 2000 to 2007. Far from healthy market competition, HCAN describes the situation as "a market failure where a small number of large companies use their concentrated power to control premium levels, benefit packages, and provider payments in the markets they dominate." So extreme is the level of consolidation, in fact, that one former top Federal Trade Commission official working with HCAN has sent a letter to the Justice Department's Antitrust Division, asking for an investigation into the health insurance marketplace.

We know Wendy Long is opposed to President Obama’s nominee for the Supreme Court but couldn’t she please get the spelling of the last name correct: Sotomayor! Incidentally, the Supreme Court vote was not 9-0 as 4 justices dissented from the majority opinion. The dissents came from Ginsburg, Stevens, Souter, and Breyer. By process of elimination, you are left to guess who the Usual Suspects were who thought that New Haven went too far in its scrapping a promotion exam because no African-Americans and only two Hispanic firefighters were likely to be made lieutenants or captains based on the results.

Sunday, June 28, 2009

Martin Feldstein discusses the modest rise in 10-year government bonds rates over the past six months and concludes:

It would be wrong for the Obama administration and Congress to reduce the fiscal stimulus in 2009 or 2010, since there is no clear evidence of a sustained upturn. But it would be equally wrong to allow the national debt to double to 80 per cent of GDP a decade from now. Increasing taxes even more than proposed would weaken demand in the near term and hurt economic incentives in the long run. The fiscal deficit should therefore be reduced by curtailing the increases in social spending that the president advocated in his election campaign.

Here's (my interpretation of) Paul Krugman's argument about the source of recent movements in long-term interest rates: There are two reasons long-term rates might rise, first more worries about the debt and inflation in the future would drive rates up, and second the prospect of better economic conditions in the future would have the same effect, rates would go up. Suppose we receive bad news about the current state of the economy. That should cause expectations of lower output growth in the future, and hence lower tax revenues and higher spending on social programs than would exist with a stronger economy. So the bad news should cause an expectation of a larger deficit and more inflation worries, and that would drive long-term interest rates up (these worries would also make foreign central banks less likely to fund US borrowing which would reinforce the increase in long-term interest rates). But if it is future economic conditions that are driving the changes in long-term interest rates, bad news about the economy should drive rates down. Last week, we received bad news about the economy. If the debt/inflation/foreign lending story is correct, long-term rates should have gone up. If the state of the economy story is driving rates, rates should have fallen. What did long-term rates actually do? They fell.

Even if we are not currently witnessing crowding-out, we shall one day have to alter the current fiscal stimulus. But that does not mean we have to curtail social spending. We do have alternatives such as raising taxes or cutting defense spending. Feldstein may be a Republican, which appears to mean that he is less willing to say that high defense spending and low taxes also lead to long-run crowding-out. But it does – and I just wish conservative economists would occasionally admit this reality.

Ed Luce comes up with a clever title but then he includes some very stale rhetoric from Judd Gregg et alia:

Once merely a worthy subject of concern, America’s fiscal outlook has rapidly become the object of widespread alarm. “Aside from weapons of mass destruction and terrorism, America’s fiscal situation is the most dangerous challenge facing the country,” says Mr Gregg. “Unchecked, it will reduce growth, weaken the dollar and ultimately undermine America’s global leadership role.” The administration cannot be blamed for what is this year an almost entirely inherited deficit. Mr Obama’s new spending accounts for only about one-tenth of it. The effects of the recession, the costs of the bank bail-out and the structural legacy of the three large tax cuts and two wars bequeathed by George W. Bush account for the remainder. Nor do critics, including Mr Gregg, blame the new president for pushing through a $787bn two-year fiscal stimulus within a month of moving into the White House. “We needed to dig the economy out of a hole,” says Mr Gregg. “I understand that.”

Well, I’m glad that at least one Republican recognizes that this President inherited both a fiscal mess and a deep recession from the economic mismanagement of the previous Administration.

But politics is quick to change. The otherwise deeply unpopular Republican party is starting to sense an opportunity. A rapidly growing proportion of the US public is registering anxiety at the sea of red ink pouring out of Washington. In the past week, two prominent polls showed that twice as many Americans were concerned about growing budget deficits as reforming healthcare – Mr Obama’s overriding domestic priority.

Republicans for the past 30 years have only pretended to care about fiscal responsibility as they simultaneously push larger defense department budgets and more tax cuts. OK, healthcare reform may indeed increase government spending but why not pay for it with tax increases:

Mr Obama has also pledged to ensure that the $100bn-$150bn a year healthcare reform will be “budget-neutral” – requiring no net extra spending. Some liberals see this as a straitjacket that could pare back the benefits he promised to extend to the 47m Americans without insurance and the tens of millions who are seen as underinsured. Conservatives, meanwhile, flatly refuse to believe it. “Obama wants healthcare spending to be budget-neutral and I want to be six foot four and have a full head of hair,” says Mr Holtz-Eakin.

Look – I’m never going to be tall either but Douglas Holtz-Eakin knows that we could indeed raise taxes if the political hacks that currently lead the GOP drop their no new tax pledge. But the ultimate nonsense comes here:

But even if Mr Obama does ensure that expansion of healthcare is fully paid for, existing spending on healthcare and the Social Security retirement scheme remains on a path that will eventually bankrupt the federal government.

Oh please – the Social Security Trust Fund has a sizeable reserve that will continue to grow for the next decade. Luce sort of notes this later but why do we continue to see this kind of stupid association of Social Security finances with the rest of Federal government finances?

Saturday, June 27, 2009

Tax cuts from the stimulus package and increases in Social Security checks lifted personal incomes sharply in May, the government reported on Friday, but it appeared that many people were putting that money away instead of spending it. Although personal spending increased slightly last month, the saving rate climbed to its highest level in 15 years as consumers tried to build a buffer against the threat of job losses and more economic hardships. The personal saving rate, which dipped below zero during the housing boom as Americans tapped home equity loans and other easy lines of credit, rose to 6.9 percent in May, the Commerce Department reported. That was its highest point since December 1993.

Pro-growth types often hail a rise in savings as means for generating more investment – but that assumes we are at full employment. Healy knows we are not:

As personal savings return to more normal levels, the increase prompts what economists call the “paradox of thrift.” Although saving money helps individuals repair their finances and pay debts, a sharp rise in overall personal saving can actually deepen a recession and hurt the people who are saving more. As people save money, fewer dollars circulate through shopping malls, Main Street businesses, and large employers and subsequently back to workers through their paychecks. This thrift pulls the economy lower.

Well said – but wasn’t those tax cuts that President Obama included in the stimulus package on the hope of getting bipartisan support supposed to give a boost to consumption demand? It seems that they neither got the Republicans to support his fiscal stimulus nor was a very good bang for the buck form of stimulus.

Thursday, June 25, 2009

As news coverage of events in Iran goes dark even as those events reportedly continue, I thought it might be worth putting up some background material on the religious political economic history of Iran, known as "Persia" prior to 1935 when Reza Shah changed the name to please his pal Hitler with his "Aryan" racial theories. The material is based on Chap. 17 of the 2004 (second) edition of Comparative Economics in a Transforming World Economy, MIT Press, by me and Marina V. Rosser. I note three interconnected themes in play before I go under the fold: national identity against outside powers (with Persia/Iran being the only Muslim nation besides Turkey not to be completely militarily conquered or directly ruled by an outside power during the past 500 years), its assertion of its Shi'i religious identity with this more recently coinciding with the effort to establish a "new traditional" Islamic economy, and, of course, the dominating role of oil in its economy in more recent decades (never below 85% of export earnings even in the 1960s when the price of oil was quite low). So, see those of you more interested below the fold, hopefully.

Persia achieved essentially its modern borders in 1501 with the coming to power of Shah Ismail, founder of the Safavid dynasty, who also imposed Shi'ism on most of the country in place of the previously dominant Sunni form of Islam. I shall not further here discuss details of Shi'ism versus Sunnism other than to note the importance of the concept of martyrdom in it and its tendency to a certain millenarianism based on the waiting for the reappearance of the Hidden Twelfth Imam, whom Shah Ismail claimed to be and who current President Ahmadinejad claims is actively supporting his government. Until the replacement of the Safavid dynasty by the Qajar one in 1785, the main foreign rival and competitor of Persia was its neighbor, the Turkish-ruled Ottoman Empire, which would become the "Sick Man of Europe" in the 19th century.

During the 19th century under the Qajars, Persia became a plaything in the Great Game between Britain and Russia, both of which had territory bordering on Persia. The Islamic clergy were the main base of nationalist resistance to them in this period, provoking a war with Russia in 1828 and pushing the cancellation a year later of the 1872 Reuter concession to Britain that allowed its companies to control mines, the national bank, and railroad construction.

However, in 1901 they failed to resist the first oil concession given anywhere in the Middle East, the d'Arcy concession to Britain in 1901. This would lay the foundation for what would first be the Anglo-Persian Oil Company, which changed its name to Anglo-Iranian Oil Company in 1935, and would later become the current British Petroleum. It was this company's holdings in Iran that democratically elected Premier Mohammed Mossadegh nationalized in 1951, which triggered MI6 to invite the CIA to organize his overthrow in 1953 in Project Ajax, which led to the reimposition of the autocratic Shah Mohammed Reza Pahlavi, and the allowing of some US oil companies to participate in the oil concession with BP, even though the Shah would nationalize all these in the 1970s.

In 1906 a combination of western-oriented intellectuals and liberal clerics overthrew the Qajar dynasty in the "Constitutionalist Revolt" and established a government based on the Belgian consitution of the day (a participant in that government was the then young Mohammed Mossadegh). The tsarist Russians organized the overthrow of this government and the reimposition of the Qajars in 1911. During WW I, Persia was humiliated by both the Russians and the British occupying parts of the country. Reaction to this led to the overthrow of the Qajars in a military coup by Reza Pahlavi, a military officer, who became Reza Shah and was father of the later Shah, Mohammed Reza Pahlavi. Reza Shah would side with the Germans in WW II to offset the Soviets and the British, and they had him removed and replaced by his son in 1941. The son was removed by Mossadegh in 1951, but would rule after his reimposition until his overthrow in the Islamic Revolution of 1979. Needless to say, since 1953 the US has been the center of attention as a foreign power (except for Iraq during the 198os war).

It should be noted that Reza Shah started many trends and patterns that remain today in the Iranian economy. He was a secular nationalist whose role model was Kemal Attaturk of neighboring Turkey. He banned Islamic clothing for women, stripped the religious foundations of their lands and the Islamic ulama of their control over the courts. He also asserted a strong state role in the government, with state-owned enterprises leading in various parts of industy using modest oil revenues available, including textiles, sugar, cement, iron, and steel. His son would establish indicative central planning in 1944, which is still in place and used today.

From the 1950s to the late 1970s, industrial investment was roughly evenly split between private and public sources, with industries then receiving public funds including in addition to those already mentioned, copper, machine tools, aluminum, and petrochecmicals, as well as auto assembly, paper, and synthetic fibres. An import substitution strategy was generally attempted, and some of these later investments involved joint ventures with foreign multinational corporations. By the 1970s, members of the Shah's families and his cronies had large interests in many of these operations, which would lead to much opposition due to corruption. Many of those firms would become those that would be taken over the bonyads, the Islamic foundations, after the Islamic revolution in 1979.

In 1963, the Shah initiated his "White Revolution" that further attempted to secularize the society (women were granted many rights), with attempts to redistribute land to peasants. Further taking of land from the Islamic foundations was an especially sore point for certain Islamic leaders, especially Ayatollah Ruhollah Khomeini, who went into exile and would return in 1979 to become the first Supreme Leader of Iran after the Islamic revolution. That revolution followed a period of increasing autocracy by the Shah following the oil price increases in 1973, which were accompanied by rising inflation and increasing income inequality, along with perceived corruption and excessive foreign cultural influences inimicable to Shi'i Islam.

The post-revolutionary regime has gone through several policy phases. We have labeled the first the First Radical Phase, 1979-1981, which was led by socialist oriented Islamic economists, with Ayatollah Taleqani one spiritual leader, who had been a supporter of Mossadegh in the early 1950s. Many nationalizations took place during this period, but there was also nearly constant fighting and much bloodshed.

The Second Radical Phase was 1982-1984, and was triggered by the Council of Guardians (appointed by the Vilayat-el-faqih, Supreme Jurisprudent or Supreme Leader, in this case, Khomeini) ruling as un-Islamic bills from the democratically elected Majlis to nationalize land and also foreign trade. This was the period in which the major Islamic elements of the economy were put into place, including the forbidding of interest in banks (which had been nationalized) as well as increased control by the bonyads of many sectors. Some industries that had been nationalized were re-privatized.

The First Pragmatic Phase was 1985-89, basically the second half of the Iran-Iraq war period, with current opposition leader, Mir Hossein Mousavi, as prime minister (a position that no longer exists). This involved opening to foreign trade and looseing of some regulations in support of the war effort. It ended with both the end of the war and the death of Khomeini, who was replaced by the current Supreme Leader, Ayatollah Ali Khamene'i.

The Second Pragmatic Phase was 1989-1997, coinciding with the two term presidency of Ali Akbar Hashemi Rafsanjani, now the leader of the Expediency Council, and apparently supporting Mousavi, with some of his children reportedly arrested in recent days. To a large extent, his policies were essentially an extension of those in the previous period, with more emphasis on private sector development, with his opponents accusing him of corruption and having achieved great wealth in this period. He was the opponent of Ahmadinejad in the 2005 election, and was veiwed then as the candidate of the entrenched clerical hierarchy against the upstart populist, Ahmadinejad.

The Social Reform Phase was 1997-2005, the period of the presidency of the somewhat moderat Mohammed Khatami. He attempted a social relaxation, but it ran into severe limits as the ulama and the Revolutionary Guards asserted their control over the police, security forces, and the courts under the authority of Khamene'i. In economics he was somewhat of a semi-socialist technocrat, emphasizing more of a state role and increasing the influence of the indicative central planners.

We do not have a label in our book for the period under Ahmadinejad, but I would call it the period of Populist Repression. He attempted to do some redistribution of income and also clamped down on social reforms. As it is, the Iranian economy remains as dependent on oil as it has been for many decades, and as I reported in another post, appears to be suffering from rising inflation and unemployment, especially youth unemployment, and ironically even rising income inequality, despite the stated goals to redistribute by Ahmadinejad.

I don’t fault Max Baucus for trying to forge some sort of reasonable bill or being a fellow member of the deficit hawk wing of the Democrat Party but let’s not lose sight of what really matters:

A bipartisan group of senators at work on health care reported progress Thursday in holding the cost of legislation to their $1 trillion target, but Republicans quickly added there was no agreement on even the outlines of a bill. "We have options that would enable us to write a $1 trillion bill, fully paid for," Sen. Max Baucus, chairman of the Senate Finance Committee, told reporters. His comments came one week after analysts set the cost of earlier proposals at $1.6 trillion over 10 years.

How much the government pays for health care is not even an issue in my book. The real budgetary issue is what do we pay as a nation overall. Let me explain with a simple example based – suppose that the average citizen currently spends $6300 a year out of his own pocket or via private insurance for health care and the government is spending $700 per person per year so the total cost of health care is $7000 per person per year. If a new health care system doubled what the government was paying (to $1400 per person per year) but lowered private payments to say $5500 per person per year, the cost of health care would then be $6900 per person per year. If we could do that with sacrificing the quality of health care, then the only issue would be how to pay for the extra government spending. Of course, the answer is easy and generally supported by the public – it’s called raising taxes. Of course, some of our nitwit political leaders see tax increases as the ultimate sin.

Wednesday, June 24, 2009

Ali Frick reports on a very well articulated tirade from Barney Franks. The backdrop:

Last week, over the objections of Defense Secretary Robert Gates and the Obama administration, the House Armed Services Committee restored funding for the basically useless F-22 fighter jet, in the process stripping funding for nuclear waste cleanup efforts. Last night, Rep. Barney Frank (D-MA) filed an amendment to restore the waste cleanup funds and eliminate the money for the F-22. The move came after months of Republicans issuing dire warnings about the consequences of suspending the F-22 program: Frank Gaffney, for example, declared it would lead to “diminished military capability, emboldening enemies, and alienating our friends.”

But it’s time to give Congressman Franks the microphone:

I am of course struck that so many of my colleagues who are so worried about the deficit apparently think the Pentagon is funded with Monopoly money that somehow doesn’t count ... These arguments will come from the very people who denied that the economic recovery plan created any jobs. We have a very odd economic philosophy in Washington. It’s called weaponized Keynesianism. It is the view that the government does not create jobs when it funds the building of bridges or important research or retrains workers, but when it builds airplanes that are never going to be used in combat, that is of course economic salvation.

A follow-up question given the role of the marginal propensity to import in the size of the Keynesian multiplier: when the government purchases a military airplane, how much of that comes from domestic versus foreign content as opposed to when the government decides to have a bridge built?

Tuesday, June 23, 2009

We have been informed that the current web-base [US Department of Defence] instruction course asks, as one of its multiple-choice questions, "which of the following is an example of low-level terrorism activity?" To answer correctly, the examinee must select "protests."

Monday, June 22, 2009

What cannot be sustained is any hegemonic claim that globalisation theory is either adequate as it stands, capable of integrated development into an adequate theory, or superior to the theories which it has displaced.

.. we face a choice between a body of theory which, no matter how analytically coherent, unfortunately fails to explain the basi facts, and another group of theories that do offer an account of the most basic trends we can actually observe, the scientific choice seems clear to me; to make progress we have first to return to the abandoned theories that do in fact explain the facts, and ask ourselves how and why they achieve it, and whether their explanations and concepts can form an element of a new, and superior theory.

[Alan Freeman, 'The new world order and the failure of globalisation'. See full reference details below.]

Unfortunately F William Engdahl's description of 'Full Spectrum Dominance' is a much tighter fit of today's frightening reality.

[*] Alan Freeman (2002): The new world order and the failure of globalisation. Unpublished.The new political geography of poverty. University of Greenwichhttp://mpra.ub.uni-muenchen.de/2652/1/MPRA_paper_2652.pdf[This is a fuller but earlier prepublication version of an analysis of stagnation and divergence in the world economy which appeared in Pettifor, A (2003) Real World Economic Outlook, pp152-159. Basingstoke: Palgrave MacMillan, pp152-164.]

“In 1991, the GDP of the world in dollars was $4,997. In 2000, it was $4,909…. the wealth-producing capacity of the world is no longer keeping up with its population growth, and the wealth-producing capacity of nearly a quarter of its people is literally marching backwards…. In the 90s per capita GDP in the countries in transition fell between 50% and 75% depending on the measure adopted, catapulting them into the ranks of the developing countries.” .”… Even in PPPs, poverty is clearly increasing in the modern world…. [Since 1970] “differential growth did not speed up the growth of the advanced countries relative to the rest of the world. It slowed down the growth of the rest of the world, relative to the advanced countries The present organisation of the world economy [is] acting systematically to undermine it. The US is growing at the expense of other advanced industrial nations…. up till 1980, US investment was financed from internal savings, which always exceeded investment. This reversed in 1980 and savings from then on fell behind investment. This was particularly marked in the 1990s expansion in which savings and investment moved in opposite directions.” *The new world order and the failure of globalisationAlan Freeman (2002): Unpublished.

The new political geography of poverty. University of Greenwichhttp://mpra.ub.uni-muenchen.de/2652/1/MPRA_paper_2652.pdf

[This is a fuller but earlier prepublication version of an analysis of stagnation and divergence in the world economy which appeared in Pettifor, A (2003) Real World Economic Outlook, pp152-159. Basingstoke: Palgrave MacMillan, pp152-164. ]

Sunday, June 21, 2009

There are dueling fatwas (religious law rulings) in Iran about nuclear weapons. In the presidency before that of Ahmadinejad back in 2003, Vilayat-el-faqih ("Supreme Jurisprudent") Ayatollah Ali Khamene'i issued one that declared the "development, production, and use of nuclear weapons" to be against Shari'a (Islamic law), ("Nuclear weapons unholy, Iran says Islam forbids use, clerics proclaim", Robert Collier, SFGate, 31 October 2003). He has never repudiated this fatwa.

However, there is a subsequent fatwa issued in 2006 by the mentor of President Ahmadinejad, the Ayatollah Mohammed Taghi Mesbah-Yazdi, who has also been the main pusher among the Iranian clerics of Holocaust denial, as reported by a "disciple" of his, Mohsen Gharavian. In that he supported production and use of nuclear weapons for self defense, ("Iranian fatwa approves use of nuclear weapons", Colin Freeman and Philip Sherwell, Telegraph.co.uk, 19 Feb 2006). Given that Khamene'i is now supporting Ahmadinejad, where does he stand on this?

BTW, while many Iranians are not keen on nuclear weapons, most reports have it that there is overwhelming support among the population for its ongoing civilian nuclear weapons program, which is not in violation of the Non-Proliferation Treaty, to which Iran is a signee, including presumably many of those now demonstrating in the streets of the larger Iranian cities.

Saturday, June 20, 2009

While many consider the forbidding of interest (riba) to be a key component of being an Islamic economy, and Iran technically does this for its state-owned banks (although not in practice), what arguably makes it the most "Islamic" of economies is the large role in the economy of Islamic charity foundations known as "bonyads" (Persian for the Arabic "waqf"). Since the 1979 Islamic revolution, these have come to play an important role in the economy, controlling by best estimates on order of 20% of Iran's GDP, all of this being in the non-oil sector of the economy (http://en.wikipedia.org/wiki/Bonyad). The Bonyads do not pay taxes and do not have to publicly report their activities (and have been accused by many as the conduits for funding of foreign groups such as Hezbollah). Controlled by mullahs (Islamic clerics), they are supposed to be charitable organizations, but most appear to do little of this and to be corrupt and bloated institutions propped up by subsidies, with 80% of them reportedly losing money. They seem to be adding to inequality in the economy, and unhappiness with their role was part of what drove support for Ahmadinejad in 2005, although he has since reinforced them, not reduced their role in the economy.

Data on income distribution is murky. Certainly Ahmadinejad made some efforts to redistribute, including raising pensions and many salaries when he first took office. However, it appears that inequality is worsening. The gini coefficient may have been as low as .37 in 2003, although was probably higher. It appears to have fallen after 1979, but then increased again later above .40, possibly declining again in the early 1990s after the end of the Iran-Iraq war. The most recently reported figure I have seen comes from early 2008 from Abbas Bakhtiar (http://www.payvand.com/news/o8/jan/1258.html) at .44 and supposedly rising. Bakhtiar also reports that the sanctions by foreigners have had a negative effect on the Iranian economy, although he blames corruption and internal problems, including a stifling influence coming from the bonyads, as primarily responsible.

It is no mystery why repressive regimes want to suppress media coverage of their crackdowns of peaceful protests but the Iranian regime has an internet problem. Nico Pitney’s live-blogging is eye opening and as far as I call tell – the regime has sent out its basij thugs in the hope of intimidating the protestors and to try to pin the blame for all of this on their false claims that the US and UK governments have been fostering terrorism. There is some evidence that the intimidation part may not be working out all that well but the regime might get their rally around Ahmadinejad if our government is foolish enough to listen to Krauthammer, Wolfowitz, Barnes, and Hayes-Kristol . As Steve Benen there are more mature Republicans who don’t advocate such stupidity and fortunately this President is not about to be Ahmadinejad’s stooge. One has to shudder to think how far this regime will go to hold onto power. But thanks to Twitter, Facebook, and blogging – the world will know even as this regime tries to block media coverage.

While many think the appeal of Mahmoud Ahmadinejad has been his Shi'i fundamentalism, in 2005 he ran against the wealthy former president and favorite of the Iranian mullah hierarchy, Hashemi Rafsanjani on populist economic grounds, complaining somewhat like Jimmy Carter in 1976 against Gerald Ford that the Iranian people were economically worse off than four years before and that he would help the poor. Supporters of Rafsanjani included the established mullah hierarchy, including Vilayet-el-faqih ("Supreme Jurisprudent") Ayatollah Khamene'i. There is evidence that Ahmedinejad has engaged in various redistributive programs especially aimed at the rural poor. However, crucial economic variables have gotten worse, just as they did for Carter by 1980, opening him up to the criticism he leveled against his earlier opponent. There are various numbers out there, but after digging around it would seem to me that the best estimate on the overall unemployment rate is that it was about 10.4% in December 2004 (http://www.payvand.com/news/04/dec/1102.html), but that by February 2009 it had hit 16.3% (http://www.encyclopedia.com/doc/1G1-594557005.html).As for poor Carter in the US, the inflation in Iran also appears to have risen as well from 13.5% in 2006 to 17.1% in 2008, prodiving the dread genie of stagflation (http://www.indexmundi.com/iran/inflation_rate(consumer-prices).html) , with some reports suggesting it has soared to over 20% in 2009, all of this with much higher oil prices than in 2005, which should have made things easy for Ahmadinejad economically. It should also be noted that most sources show youth unemployment being anywhere from 50-100% higher than the overall rate, thus quite possibly over 30% now, with that of young women possibly as high as 50%. No wonder that Ahmadinejad has been hurting badly on the economic issue, both with fervent youth now in the streets, as well as with such previous backer as the conservative bazaari merchants and even reportedly with elements of the military and Revolutionary Guards who respected Mousavi's performance as prime minister during most of the Iran-Iraq war in the 1980s.

The real question now, in the face of clear electoral fraud by the regime, is why Khamene'i has switched sides and is backing Ahmadinejad this time over Mousavi, who appears not to have threatened the foundation of the regime before now. Khamene'i has called for there to be no demonstrations today in Iran, with the threat that any might be put down violently. This becomes even more problematic given that the one authority able to replace his is the council headed by former president Rafsanjani, whom he reputedly supported in 2005, but who now supports Mousavi by the best reports. Clearly this is a moment of deep decision in Iran, and I do not have a full explanation or understanding of what is really going on there. At this point I hope that there is not too much bloodshed, while truth and justice prevail.

Thursday, June 18, 2009

I have just observed one of the more curious disjunctures in the media between what is appearing in the media of one language and in another. I have just returned from France where I was watching Euronews in French and reading French newspapers, as well as various US and British sources in English and have looked through Juan Cole and WaPo and some others. I do not know the explanation of the disjuncture nor which is correct. Actually it is not a matter of disagreement so much as that the French are reporting something that I have seen zero reporting of in any of the English language media.

The matter is the reputed leaking of the actual vote totals from the Ministry of the Interior in the Iranian presidential election. Both on Euronews and in the newspaper Liberation the story is that the ministry was seized early in the aftermath of the election, throwing out the official functionaries. One of those is the reputed source of the vote totals reported in these sources. They are the following, to the nearest million:

So, if these numbers reported in the French language media are correct, Ahmadinejad not only did not get 62%, with Moussavi at 34, but he came in third with less than a third of the votes of Moussavi. If this report is correct, nobody in the world should be surprised by what has been happening there.

Sandwichman cries "Foul!" on the Economist and its blogger, Charlemagne, for perpetrating a LUMP OF CRAP hoax on its readers.

Back then [the 1980s and 1990s] many politicians, unions and workers also fell for the "lump of labour" fallacy, which suggests that there is a fixed amount of work to be done at any given time, available for slicing up and sharing out according to policymakers’ will.

As longtime Sandwichman followers know, the alleged fallacy is a canard, one that the Economist trotted out 17 times between 1993 and 2005, giving rise to the following satire, composed entirely from sentences from the magazine:

[UPDATE: Dean Baker agrees that The Economist Gets the Arithmetic of Shorter Work Time Wrong.]"The idea that a fixed quantity of work exists, to be parcelled out among workers, is the so-called lump-of-labour fallacy. It is depressing that supposedly responsible governments continue to pretend to be unaware of the old 'lump of labour' fallacy: the illusion that the output of an economy and hence the total amount of work available are fixed.

"The notion that there is a fixed amount of work to be shared out, so that shorter hours for all must mean more jobs, is widely derided by economists as the 'lump of labour' fallacy. The idea of the 35-hour week, derided by many economists as the 'lump-of-labour fallacy', is that if employees work less, companies, spurred by tax concessions, will hire more. Although mocked by economists as a prime example of the 'lump-of-labour' fallacy – the idea that there is only so much work to go around – the government claims that it had created 240,000 jobs by the end of 2000. But to conclude from this that overall employment will decline is to succumb to the lump-of-labour fallacy: the long-disproved idea that there is only a fixed amount of output (and hence work) to go round.

"France's own Frédéric Bastiat had pointed out two centuries ago that there is no limit to the work that needs doing. Debunking the 'lump of labour fallacy' before it was even given that label, he suggested that to parcel out the limited amount of work available, people should be required to use only one hand, or even to have a hand chopped off. But -- the lump of labour fallacy strikes again -- the amount of work to be done is not fixed. The quantity of work is not fixed: such a notion is known to economists as the 'lump-of-labour' fallacy.

"The lump of labour fallacy also lies behind paranoia about jobs being 'stolen' by low-wage countries. The accusation that migrants steal jobs is a version of the 'lump of labour' fallacy -- that there is only so much work to go around. In effect, export pessimism involves a fallacy of its own -- a 'lump-of-trade' fallacy, akin to the idea of a 'lump of labour' (whereby a growing population is taken to imply an ever-rising rate of unemployment, there being only so many jobs to go round).

"This is a classic lump-of-labour fallacy (the idea that there is a fixed quantity of work and that if you take a job it is at my expense). Economists call this the 'lump-of-labour' fallacy. Economists call this the lump of labour (or sometimes the lump of output) fallacy.

"The lump of labour fallacy is often to blame for confusion about whether productivity growth (due to more efficient working practices or to new technology) is a good or bad thing. Luddism is also commonly linked to the lump-of-labour fallacy in economics, which first-year students are taught to refute and according to which, as the demand for labour is fixed in the short run, labour-saving machinery is bound to 'kill jobs'. But the assumption that this results in fewer jobs rather than more output (and hence more goods, and more job-stimulating demand, in a beautifully virtuous circle) is based on an economic fallacy known as the 'lump of labour': the notion that there is only a fixed amount of output (and hence work) to go round.

"If new technology or foreign competition do lead to net job losses it will not be because the lump of labour has become a fact rather than a fallacy, but because labour is not sufficiently mobile between sectors and regions, or because relative wages have failed to adjust. Nearly all of these mistakes boil down in the end to the most enduring of all economic fallacies: the idea that there is only so much output to be produced, or capital to be invested. (Europe is currently preoccupied with the 'lump of labour' version of this mistake, see page 18.)

"A recent piece accused conservatives of embracing the 'lump of labour fallacy', the mistaken claim that there is a fixed quantity of work which governments must strive to allocate equitably. Hmm. Are those arguments entirely incorrect? Yes, entirely. The first is a myth. In fact, the paper he cited did not commit the lump of labour fallacy."

I believe the most egregious falsehood peddled by economics is the rational choice picture of human agency. I believe it is false not, like the behaviorists, because people make systematic mistakes in trying to be rational, but because we are not trying to be rational - in the sense the theory means, the belief-desire model, where desires are reasons - at all. Our lives are spent for the most part, and for the most meaningful part, as participants in a diverse set of "practices" (in the sense made famous by Alasdair McIntyre's After Virtue). Being a participant in a practice means, inter alia, governing one's desires in acccordance with norms, norms to which we grant authority. Practices are in many cases constituted by deontic constraints on participants. There is a wonderful new book by the philosopher James D. Wallace, Norms and Practices, which I strongly recommend to fans of the rational actor model. At one point he quotes John Dewey and I want to pass it along. Dewey was not known for his eloquence, but as Wallace notes, this passage is an astonishing exception:

"The eternal dignity of labor and art lies in their effecting that permanent reshaping of environment which is the substantial foundation of future security and progress. Individuals flourish and whither away like the grass of the fields. But the fruits of their work endure and make possible the development of further activities having fuller significance. It is of grace not of ourselves that we live civilized lives. There is sound sense in the old pagan notion that gratitude is the root of all virtue. Loyalty to whatever in the established environment makes a life of excellence possible is the beginning of all progress. The best we can accomplish for posterity is to transmit unimpaired and with some increment of meaning the environment that makes it possible to maintain the habits of decent and refined life. Our individual habits are links in forming the endless chain of humanity. Their significance depends on the environment inherited from our forerunners, and it is enhanced as we foresee the fruits of our labors in the world in which our successors live." (The source is Human Nature and Conduct (1922) a wonderful book altogether).

Tuesday, June 16, 2009

the flipside of failure is opportunity ... the failure of certain chains and restaurants has created opportunities for other eating establishments to expand. Restaurant growth in any kind of economy is expensive, but it's cheaper for chains to convert existing restaurants than to build them from the ground up. Thanks to the closing of various eateries nationwide, expansion for rising chains has been less expensive … It would be impossible to calculate, but it's likely that the creation of the Hummer brand (and the factories necessary to build it) from scratch would have cost many multiples of the $500 million that Sichuan paid GM for Hummer. The Chinese company will now be able to grow on the relative cheap, and as GM announced at the time of the deal, its purchase means that 3,000 U.S.-based jobs will be saved. All of these stories are in no way meant to minimize the pain of losing one's house, job or business. Still, these stories do remind us that just as the human body frequently heals itself during times of illness, the economy is ultimately comprised of self-interested individuals who, if left alone, will work in order to improve their individual financial situations. In that sense, the answer to our sagging economy today is not more government intervention, but instead a humble federal government that will sit back and let the economy heal itself. The flipside of economic failure is economic opportunity, and it's time for Washington to get out of the way so that individuals can turn misfortune into opportunity.

That's quite a conclusion based off five anecdotal examples. Indeed, as a macroeconomic prediction, it's not even clear what it means. What would a "humble federal government" do, exactly? Shut down the stimulus projects so a couple million more people end up unemployed and a couple million other people can buy their possessions at fire sale prices? Shut down the system of financial supports which are currently sustaining a weakened lending market? Should they have held back from Detroit's collapse so that the assets of the various companies were simply liquidated, along with what was left of the Rust Belt's economy? Should they cut off economic aid to the states so infrastructure literally crumbles? I want specifics! The idea that government should get out of the way because Panera has taken over eight of Bennigan's former locations beggars belief. At the end of the day, it will be a resuscitation of household spending and business expansion that restarts our economic growth. But for now, both have fallen through the floor, with terrible consequences for both individuals and businesses. What little demand exists is being substantially kept afloat by the massive intervention of the federal government. At this moment, federal spending does not exist in competition with household spending. It's one of the last forces sustaining it. Indeed, the idea that the economy will heal itself if the government only steps out of the way is exactly the thinking that led to the deep recession of 1937. What a pity those lessons haven't been better learned.

Question to the editors of Forbes – why did you even bother to publish Tamny’s musings?

Friday, June 12, 2009

There is the dubious kind of "profit" that exports two-dollar wheat and gets in exchange a Dust Bowl.

We may assume that most predictions put forward in 1937, like those of other years, would now be worth recalling only as examples of fallibility. But at least one prediction published in that year has since come to seem exceedingly perspicacious. It appeared in a book by Kenneth Burke, a literary critic:

Among the sciences, there is one little fellow named Ecology, and in time we shall pay him more attention. He teaches us that the total economy of this planet cannot be guided by an efficient rationale of exploitation alone, but that the exploiting part must itself eventually suffer if it too greatly disturbs the balance of the whole (as big beasts would starve, if they succeeded in catching all the little beasts that are their prey their very lack of efficiency in the exploitation of their ability as hunters thus acting as efficiency on a higher level, where considerations of balance count for more than consideration of one tracked purposiveness).

In her article, "'One little fellow named Ecology': Ecological Rhetoric in Kenneth Burke's Attitudes toward History." [2004]), Marika Seigel points out that Burke's awareness of ecology in 1937 was by no means unique or idiosyncratic. There was, as Burke himself capitalized in his footnote, a Dust Bowl going on and being reported dramatically in the popular press. Consider, for instance, the following montage of images from The New Republic, The Nation, News-week and Paul B. Sears's Deserts on the March. This 'mere sequence' of images, cited in Seigel's article, composes a compelling narrative: scene, characters, back-story, moral.

A black or yellow copper-brown cloud pokes its ugly head over the horizon. It rises slowly at first, then swiftly. It marches angrily, blotting out the world as it comes. Children scurry like chickens to their mother's wing. With a howl the storm burst upon us. The impact is like a shovelful of fine sand flung against the face. People caught in their own yards grope for the doorstep. Cars come to a standstill, for no light in the world can penetrate that swirling murk.

Three men and a woman are seated around a dust-caked lamp, on their faces grotesque masks of wet cloth. The children have been put to bed with towels tucked under their heads. My host greets us: "It takes grit to live in this country."

Two-dollar wheat during the war lured growers farther and farther into the West. The deeper they went, the dryer they found the country. Gang-plows ripped and chopped sage brush and the hardy native grasses. The roots of these plants had been the straw in the brick of the Great Plains' soil. When they were destroyed the soil crumbled. Each year's ploughing left a raw surface exposed to the winds.

No work of ignorance or malice is this but the inevitable result of a system which has ever encouraged immediate efficiency without regard to ultimate consequences.

It takes grit to live in this country.Bowen, William. “Our New Awareness of the Great Web.” Fortune Feb. 1970: 198-99.

Thursday, June 11, 2009

We're conducting a little informal experiment here at EconoSpeak. Does controversial, sensationalist material that you can do nothing about attract more comment (whether pro or con) than substantive historical analysis that informs crucial policy decisions and could be the basis for building a progressive political bloc?

Wednesday, June 10, 2009

So, I delivered a plenary address in Jonkoping, Sweden at the 6th International Conference on Nonlinear Economic Dynamics, with some semi-juicy stuff from it below the fold. However, for above the fold I shall comment on the general atmosphere. What is in is agent-based modeling of the nonlinear dynamics of financial markets, especially speculative bubbles and crashes. Other topics covered included oligopoly dynamics, macroeconomic fluctuations, ecologic-economic models, and regional models, as well as some pure math stuff.

Some of the people doing the financial markets modeling are those who have been way ahead of what has gone on, such as Frank Westerhoff who was in the NY Times last fall, or Serena Sordi and Alessandro Vercelli of Siena, who have been modeling Minsky dynamics for years and are now looking very prescient indeed. But now it is very faddish to do this stuff, although I think that it is indeed the way to go. So, one participant who is an industrial organization person was complaining about "there are too many financial models," and then he chaired a session on oligopoly dynamics. Much to his annoyance, one participant who was supposed to present a paper on Stackelberg entry, completely changed his topic to.... financial market dynamics. Oh well. Guess there will be an intellectual speculative bubble in this stuff for awhile, even if some of the folks at this are doing the real thing.OK now for the juicy stuff from my talk, which was on "Nonlinear Economic Dynamics in Urban and Regional Economics." I covered a lot of stuff that will be in my forthcoming Vol. II of the second edition of my From Catastrophe to Chaos: A General Theory of Economic Discontinuities. However, along the way I documented how Paul Krugman failed to cite other peoples' work, especially that for which he received the Nobel Prize, and showed some figures he published that look like figures in other peoples' work appearing before his that he never cited, and so on and on. I figured I might be in trouble cricitizing the Swedish Royal Academy on Swedish soil, but discovered quite the contrary: the local economists knowledgeable about this material were in full agreement and even said that I had not gone far enough. Apparently the prize not shared with some others for Krugman has created a major "scandal" behind the scenes in Sweden, with phrases such as "committee not well read" "procedures for the committee need reforming" and so on being stated. I will not say all I heard, but I must say that none of it was at all flattering to Paul Krugman, some of it reflecting astoundingly petty conduct on his part. Anyway, they all are down on his case for not citing people who did work before him for which he got the prize.

After a particularly dramatic remark on my part, there was a loud crack of thunder, and one member of the audience declared, "I knew it!"

Oh, this is not juicy particularly, but I also chaired the final session, at which it was decided to found a Nonlinear Economic Dynamics Society on my motion, with me proposing an executive committee, without me on it, but which means the outfit will probably continue to exist.

Tuesday, June 9, 2009

I am pleased to announce the publication of the Handbook on Research on Complexity, edited by me, which has just come out from Edward Elgar. As with all books from his shop, I fear it will be too expensive for most individual readers (get your libraries to order it), at US $ 230.00 (I do not control pricing). Among the authors, besides myself (three chapters), the others are in order of chapters, Brian Arthur, K. Vela Velupillai, Cars Hommes, Michael Kopel, Alan Kirman, Richard H. Day, Thomas Lux, Joseph McCauley with Kevin Bessler and Gemunu Gunaratne, Frank Westerhoff, Hans-Peter Brunner with Peter Allen, Herbert Gintis with Ross Cressman and Thijs Ruijgrok, Roger Koppl, and David Colander, dealing with a wide variety of topics covering many areas of economics.

Based on these observations, we conclude that the red layer of the red/gray chips we have discovered in the WTC dust is active, unreacted thermitic material, incorporating nanotechnology, and is a highly energetic pyrotechnic or explosive material.[1]

Monday, June 8, 2009

In May 1927, Henry Ford gave the order to shut down production of the Model T to retool for production of the Model A. According to a special report that appeared in the May 5, 1956 issue of Business Week, "Selling to an Age of Plenty," that action by Ford marked "a great divide in modern times... the transition from the Age of Production to the Age of Distribution."Ford had been reluctant to implement a model change and had earlier declared he would not do so. But competitive pressure from the successful sales strategy of General Motors eventually forced his hand. Beginning in 1923, General Motors had introduced the annual model change for Chevrolet, a move that vaulted the Chevy from a mediocre second-string vehicle to a Brand. The Chevy was murdering the Flivver.

Three years after the Ford Motors shut down, a satirical essay by Kenneth Burke appeared in the New Republic magazine. Titling his essay "Waste -- The Future of Prosperity," Burke dedicated it to Henry Ford who Burke mistakenly credited with the model change and the "planned obsolescence" concept.

Burke's Veblen-inspired satire revolved around what he called the "Theory of the Economic Value of Waste," which may be stated as: "The more we learn to use what we do not need, the greater our consumption, the greater our consumption, the greater our production; and the greater our production, the greater our prosperity." "By this system," Burke explained, "business need never face a saturation point. For though there is a limit to what a man can use, there is no limit whatever to what he can waste." With the sole proviso that, "We have simply to make sure that the increase in the number of labor-saving devices does not shorten the hours of labor."

Besides annual model changes for automobiles, Burke ruminated on such advances as disposable razor blades, skyscrapers, beverages, advertising, prisons and war as vehicles for stimulating the economy and keeping people busy "for at least eighteen hours a day replacing the wasted commodities."

Twenty-six years later, writing in The Nation, Burke got the opportunity to retract his unjust indictment of Henry Ford when Business Week published the article mentioned in the first paragraph.

My article like all burlesques was based on what I thought was a grossly exaggerated statement of my case. But recently (in their May 5 and June 16 [1956] issues) Business Week published two articles that startled me, and even nonplussed me, by offering as simple gospel a line that, if I could have thought of it when I was writing my burlesque a bit more than a jubilee ago, I'd certainly have used as the perfect frisky summing-up of my thesis "Just past the midmark of the 20th Century," we read, "it looks as though all of our business forces are bent on getting every one . . ." (and here is the notable slogan) to "Borrow. Spend. Buy. Waste. Want." I would then have looked upon such a slogan as ideal material for a farce. Now presumably it is to be taken in full earnest. In my original article, also, I thought I was making much sport of the trick psychological devices whereby a customer with a perfectly serviceable car was persuaded that he should get rid of it because there was a newer model available. In particular, I guyed the doctrine of "obsolescence" that was implied in such high-pressure selling tactics. But now I find Business Week referring quite respectfully to the way in which General Motors "adopted the annual model change, helping to establish the auto industry's renowned principle of 'planned obsolescence.' " I had mistakenly thought that the principle was a joke; by now it has become "renowned." A correction of another sort is in order, too. I had featured Henry Ford as the person most responsible for this type of economy. However, the articles in Business Week point out that, on the contrary, Henry Ford was an old-timer ("the archetype of the production man") with an antiquated Puritanical notion that, if you gave people a serviceable car at a price made progressively lower by increased sales, a car that the buyer might use for several or even many years before it needed replacement, you would have done enough. According to Business Week, it was General Motors that freed us of such old-fashioned nonsense, and started the rat-race of the annual change-over, plus the inducements of ever-lengthening time for payment on the instalment plan; and Ford was reluctantly driven to the same methods by the pressures of the situation, with its technologically and financially Darwinian competition for survival. The articles help us see how, when other industries such as appliances and plastics developed by following the same marketing procedures as General Motors, we finally came to have, in all its perfection, "the Consumption Economy," the "age of distribution, of the consumer and his foibles," in brief the Grand Convergence or Fatal Confluence of the factors that make up what now usually goes by the honorific title (and perhaps partial misnomer) of "The Higher Standard of Living."

. . . our abundant society is at present simply deficient in many of the most elementary objective opportunities and worthwhile goals that could make growing up possible. It is lacking in enough man’s work. It is lacking in honest public speech, and people are not taken seriously. It thwarts aptitude and creates stupidity. It corrupts ingenuous patriotism. It corrupts the fine arts. It shackles science. It dampens animal ardour. It discourages the religious convictions of Justification and Vocation and it dims the sense that there is a Creation. It has no Honour. It has no Community. Just look at that list. [1]

Speech cannot be personal and poetic when there is embarrassment of self-revelation, including revelation to oneself, nor when there is animal diffidence and communal suspicion, shame of exhibition and eccentricity, clinging to social norms. Speech cannot be initiating when the chief social institutions are bureaucratized and predetermine all procedures and decisions, so that in fact individuals have no power anyway that is useful to express. Speech cannot be exploratory and heuristic when pervasive chronic anxiety keeps people from risking losing themselves in temporary confusion and from relying for help precisely on communicating, even if the communication is Babel.

To the right is an image of protesters at the Vietnam moratorium march held in Melbourne on 8th May 1970. This event - the biggest the city had ever seen - was organised by Dr Jim Cairns [1] and held only a few days after 4 students were killed and 9 wounded by US National Guardsmen at Kent State University in America.[2]

The Australian establishment was horrified, "predicting blood in the streets and the Minister for Labour and National Service said "it was an invitation to anarchy". Later he called the supporters of the Moratorium "political pack-raping bikies" while the Prime Minister of the day said they were storm troopers." [3]A few years prior to this event the US State Department had opposed Dr Cairns' application for an entry visa to enable him to engage in a speaking tour against the continued US and Australian military involvement in Vietnam. However, the State Department capitulated when they were advised by Australia's Foreign Minister that such a refusal would be considered "against the interest of Australia if a member of the Australian Parliament was rejected entry into the US." [4]

I was 15 years old then and I didn't know why boys close to my age were being conscripted to fight in this Asian nation. Miseducation was (and remains) compulsory.

Jim Cairns' book entitled 'Silence Kills' has a description of the Vietnam War. On the first page of his book it says:

Vietnam is one-twenty-eight the size of the United States. Its total population is one-sixth that of America. The average Vietnamese lives for a year on less than the average American consumes in a week. Vietnam is a peasant country with little science and little industrial power. America, an industrial giant, is able to send men to the moon. Vietnam has no air force or navy. American aircraft bomb and strafe South Vietnam without fear of attack. Her powerful navy shells hamlets, villages and towns and sends out fighters and bombers while riding safely miles out to sea. The United States is a vast sanctuary where tens of thousands of men in industry turn out bombs, napalm, gases, aircraft, guns, mortars and all the weapons of war; and to this sanctuary America has added the airfields of Thailand and benefits from aid from a dozen 'free world' nations all of whom are safe from attack. Vietnam, in the south, has been bombed, shelled and burnt almost back to the stone age.

Wars and mainstream thought are wrong. Dead wrong. Many years and many books later the questions on the Vietnam War still keep coming.

People are uneasy about and ashamed of the world that they have given their children to grow up in. My parents were resigned about their own convenient adjustments, but they were, by no means willing to see their children robbed of a life of worth.

There is not one scintilla of evidence of Australian troops torturing prisoners of war in Vietnam.[5]

[Army chiefs admitted that water torture was used against captured Vietnamese.]

This is our great adventure, and a wonderful one it is. [6]

If we quit Vietnam, tomorrow we'll be fighting in Hawaii and next week we'll have to fight in San Francisco. [7]

There is little evidence that the Viet Cong have any significant following in South Vietnam. [8]

Oh, it's so hard to give expression to the process of the loss of ethical values that has gone on for so long. There are several edits to this post this morning. Many words are devoted to science, and invention and to practical organisation. It's expedient, but a language appears to have died in the process.

Now the killing fields extend to the world's oceans, forests and the global economy? Greed proves its exponential function.

An autopsy for national and global death needs to be carried out. Part of this process "must read Vietnam."[9]

[1] Doctor Jim Cairns was the former Deputy Prime Minister of Australia in the Whitlams Government. He was forced to resign as a result of what he claims were lies posted in the Melbourne Age (Fairfax) newspaper. (See 'Oil in Troubled Waters' by Jim Cairns. Page 92. Published by Widescope International Publishers Pty Ltd, 1976.)

[3] A reminder of Vietnam by Pauline Mitchell*http://www.cpa.org.au/garchve03/1161cairns.html

[4] 'Straight Left' by Tom Uren. Random House, 1995. page 188, 189.

[5] Australian Defence Minister Phillip Lynch, responding to Australian journalist John Sorell's claim in the Melbourne Herald, 1966.

[6] Hubert Humphrey, United States Vice President on Vietnam, 1967.

[7] Lyndon Johnson, United States President, 1967. He was elected as a peace candidate in 1964 but then his administration organised the 'Gulf of Tonkin' incident to encourage the American people to yet another war.

Sunday, June 7, 2009

Measurement of profits always includes a certain degree of subjectivity as long as the operation involves durable physical assets or longer-term financial assets, the value of which will depend upon future economic conditions. The economist who concerns himself most deeply with this issue was J. R. Hicks, a younger contemporary of Keynes. Hicks recognized that accounting is backward looking, while economic values depend upon the unknowable future. I backward looking, Hicks meant that accountants use previous prices and extrapolations based upon historical experience. Economics looks at an investment in terms of how it is expected to perform in the future.

For example, when a business purchases a computer for $10,000, it does not write off the full cost in the year of purchase. Instead, it will follow an accounting convention, which will subtract a fixed amount of depreciation for each year of its expected life. Nobody knows whether the computer will be obsolete in two years instead of the expected five. If it has to be replaced sooner than expected, then the computer will have to be depreciated prematurely.

The degree of uncertainty becomes far greater with financial instruments. For this reason, accounting rules can become a matter of life and death for a corporation. To make matters worse, accounting tricks permit corporations to create an illusion of success. Such practices do not depend upon Enron-like fraud. Instead, skilled accountants can circumvent the law, making financial regulation into an oxymoron. At the same time, investors presumed to be making informed decisions, even though they have no way of penetrating the opacity of accounting that supposed to measure how well a firm is doing.

The FASB is supposed to be there to provide investors with reliable information, but when this information became inconvenient, Congress stepped in. Congress did not have to pass any laws; it merely had to threaten to do so.

So now the banks are healthy. The stock market is improving. When will the other shoe drop?

The previous post described how Congress coerced the FASB to change accounting methods to make banks look healther.

Floyd Norris at the NY Times gives an aggregate investment of the profits that Wall Street desired accounting changes made possible. The following Bloomberg article gives some estimates about the effects on Citi's and Wells Fargo's profits.

Norris concludes "Both the banks and their regulators see virtue in opacity."

"David Zion, the accounting analyst at Credit Suisse, is out with a report today on fair value accounting, in which he calculates how many billions of dollars were added to bank "values" by the changes that the Financial Accounting Standards Board (FASB) was forced to make: "We estimate first quarter pretax earnings improved by $4.9 billion as a result of the new other-than-temporary impairment (OTTI) rules for the 20 Financials sector companies that early adopted them, including eight companies where the new rules may have increased pretax earnings by more than 5%. In addition, the FASB's mark-to-market clarification resulted in five of the 20 companies marking assets up from $27 million to $4.5 billion"."

"Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are."

"Citigroup's $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. "The big banks' profits were totally bogus," says Weiss, whose 38-year-old firm rates financial companies. "The new accounting rules, the stress tests: They're all part of a major effort to put lipstick on a pig." Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get."

"FASB also let companies recognize losses on the value of some debt securities on their balance sheets without counting the writedowns against earnings. If banks plan to hold the debt until maturity, they can avoid hurting the bottom line. At Citigroup, the recipient of $346 billion in fresh capital and asset guarantees from the government, about 25 percent of the quarterly net income came thanks to the debt securities rule change, the bank said."

"Another $2.7 billion before taxes came from an accounting rule that lets a company record income when the value of its own debt falls. That reflects the possibility a company could buy back bonds at a discount, generating a profit. In reality, when a bank can't fund such a transaction, the gain is an accounting quirk, Weiss says."

"Without those accounting benefits, Citigroup would probably have posted a net loss of $2.5 billion in the quarter, Weiss estimates. In the five previous quarters, Citigroup lost more than $37 billion."

"Wells Fargo also took advantage of the change in the mark- to-market rules. The new standards let Wells Fargo boost its capital $2.8 billion by reassessing the value of some $40 billion of bonds, the bank said in May. And the bank augmented net income by $334 million because of the effect of the rule on the value of debts held to maturity .... The higher valuations Wells Fargo put on its securities probably won't last, as defaults increase on home mortgages, credit cards and other consumer and corporate lending, Northeastern's Sherman says."

"The Federal Reserve, which designed the stress tests, used a 21 percent to 28 percent loss rate for subprime mortgages as a worst-case assumption. Already, almost 40 percent of such loans are 30 days or more overdue, according to Tavakoli, who is the author of three primers on structured debt. Defaults might reach 55 percent, she predicts. At the same time, the assumptions on how much banks can earn to offset their losses are inflated, partly because of the same accounting gimmicks employed in first-quarter profit reports, Weiss says."

Congress coerced financial regulators to let Wall Street redefine the way it measured profits -- allowing the big banks to show profits and pass the highly vaunted stress test. In the next post, I will indicate how effective this technique has been in creating an illusion of profitability. Then in a third post, I will offer some more comments.

"Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets. Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter. The accounting issue lies at the heart of the financial crisis: Are the hardest-to-value securities worth no more than what the market is willing to pay, or did the market grow too dysfunctional to properly set values?"

"The rule change angered some investor advocates. "This is political interference on a major issue, and it raises questions about whether accounting standards going forward will have the quality and integrity that the market needs," says Patrick Finnegan, director of financial-reporting policy for CFA Institute Centre for Financial Market Integrity, an investor trade group."

"The rules had required banks, securities firms and insurers to use market prices to help assign values to mortgage securities and other assets that don't trade on exchanges -- to "mark to market." But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation's largest firms on the brink of failure. Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate."

"Rep. Paul Kanjorski, a Pennsylvania Democrat who heads the House Financial Services subcommittee that pressed for the accounting change, received $18,500 from coalition members in the first quarter, the second-highest total among committee members, according to Federal Election Commission records. Over the past two years, Mr. Kanjorski received $704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics."

"During a March 12 hearing before the House subcommittee, FASB came under intense pressure from committee members. "If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself," Rep. Kanjorski said in his opening remarks. "We want you to act," Rep. Kanjorski told Robert Herz, FASB's chief. Mr. Herz waffled about how quickly the standards board could act. Rep. Kanjorski leaned over the dais. "You do understand the message that we're sending?" he said."

""Yes," Mr. Herz replied. "I absolutely do, sir." FASB made speedy revisions to its rules. In an interview, Mr. Herz said FASB merely accelerated the matter on its agenda, and tried to be responsive to input from investors and financial-services firms."

"The change helped turn around investor sentiment on banks. Financial firms had the option of reflecting the accounting change in their first-quarter results; they will be required to do so in the second quarter. Wells Fargo & Co. said the change increased its capital by $4.4 billion in the first quarter. Citigroup Inc. said the change added $413 million to first-quarter earnings. The Federal Home Loan Bank of Boston said the shift boosted its first-quarter earnings by $349 million. Robert Willens, a tax and accounting analyst, estimates that the changes will increase bank earnings in the second quarter by an average of 7%."

"Mark-to-market accounting has been around for decades. Many banks were content with the rules when the markets were going up. But the rules became a big problem in late 2007. As markets turned down, FASB clarified the rules and established how certain financial instruments, including mortgage securities, should be valued. The guidelines said valuations should reflect "observable" input such as market prices whenever possible. They required banks to disclose extensive information about assets they were unable to value based on market prices. Financial firms last year reported losses or write-downs totaling roughly $175 billion, according to Michael Mayo, an analyst at the CLSA unit of Credit Agricole SA."

"Rep. Gary Ackerman (D., N.Y.) and Rep. Kanjorski pushed Mr. Herz to agree to a speedier timetable. They repeatedly cited Rep. Perlmutter's legislation to broaden oversight of FASB. "It will be done in three weeks. Can and will," Rep. Ackerman instructed Mr. Herz. "Yes," Mr. Herz replied. "Can and will," Rep. Ackerman repeated. Rep. Ackerman declined to comment through a spokesman. A FASB director, Lawrence Smith, said at the time that FASB had little choice but to act. "We can't ignore what's going on around us," he said."